I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

The Kochs Will Not Make A $100 Billion Profit From Keystone XL

There’s a claim being made that the Koch brothers (or Koch IndustriesKoch Industries perhaps) will make a $100 billion profit as and when Keystone XL is built. This is such a fabulous claim that I thought I’d better have a look at the numbers they were using. And the answer is that it’s not just a fabulous claim, it’s a fantastical one: the authors have confused gross income with profit.

I first saw the claim over at Grist which led me to this little report.

The report, entitled Billionaires’ Carbon Bomb: The Koch Keystone XL Pipeline, reveals Koch Industries substantial interest in the controversial pipeline. Staggering numbers punctuate the report; the Kochs hold up to 2 million acres in Alberta, could earn $100 billion in profits from the project,….

Their estimation is a little odd but it’s not entirely wrong, not to begin with at least. They estimate the size of the brothers’ holdings in the tar sands area, work out how many barrels of oil might be extracted. Then they assume that the price of that oil is depressed because there’s no pipeline and more expensive forms of transport must be used. Assume the existence of a pipeline, that discount goes away and multiply the barrels of oil by that now gone discount and you’ve got the amount the Kochs will make.

I wouldn’t want to have to stand behind that calculation in any detail myself but it’s not an entirely wrong way to go about things. We could quibble in the details: they’re assuming that without a pipeline the oil will still be profitable to lift which isn’t necessarily true. But the basic premise is valid. Except then they stumble really rather badly:

KEC’s potential profits due to KXL could easily reach $100 billion, more than the Kochs’ current combined net worth of $92B. These profits can be roughly projected by multiplying two key figures: 1) 15 billion barrels of recoverable, profitable-to-produce tar sands crude oil that KEC could have on its reported two million acres in Alberta’s tar sands territory; multiplied by 2) $15 gross profit from production per barrel due to KXL. Multiplying these two key figures produces a $225 billion gross profit due to KXL solely from production. While KI’s refining subsidiary, Flint Hills Resources (FHR), might make $120 billion less in profits due to KXL, KI overall would still profit enormously.

Bottom-line, KI’s net profit could still easily total $100 billion.

Have you spotted it?

Well done, help yourself to a cookie. For the numbers they’ve calculated, if we for the sake of argument assume they’re correct for a moment, are the increase in gross revenue that would come from the Keystone XL pipeline. And no, gross revenue is not equal to profits, not in any realistic model of this universe at least. For there are costs associated with the pipeline: building it for one thing, running it for another. It’s that skipping from an increase in gross revenue to net profit that’s the mistake.

But wait! There’s one more mistake here. A conceptual one this time, not one of accounting. Let’s, again just for the sake of argument, accept what they’re trying to tell us. There really will be a $100 billion profit from the building of Keystone XL. This is being used as an argument against the building of the pipeline: when in fact it’s an extremely strong argument in favour of building it.

Recall what profit actually is: it’s the surplus from sales over and above the cost of production of whatever it is. Another way of saying the same thing is that profit is the value added by the activity, whatever it is. So if there’s a $100 billion profit to be had by the building of Keystone XL then that’s another $100 billion of wealth that has been added to the stock available to us, the human race. Sure, maybe the Kochs will have it for some period of time. But it’s still $100 billion of wealth that has been newly created.

Keystone XL is apparently costed at $7 billion. We’ve now a claim that it’s going to create $100 billion of new wealth. That sounds like an alarmingly strong argument that it should be built to me.

I should emphasise that I don’t believe the $100 billion profit number for a moment. But if it is true and the world can be made that much richer for a cost of only $7 billion then we should get on and build it as soon as possible. Preferably by next Tuesday lunchtime as there really aren’t that many projects out there that could create so much value for such low cost.

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The point is that the Kochs will make a shttload of $$$ off of the Keystone pipeline and they have been bribing our politicians to get what they want. They will hoard and use this $$$ to skew the political system even more than they already have. That cash won’t be tricklin’ down to you, me or anybody else I know in the foreseeable future. You can argue that Grist’s numbers are not right all you want but the fact that those obscenely rich & powerful turkeys will get way more rich & powerful if that thing gets built is indisputable. Good luck waiting for your piece of the pie while the planet ‘s climate gets turned upside down and the air around here starts looking like Harbin China.

Of course, the point of the “Billionaires’ Carbon Bomb” report is to show that the Koch brothers, whose father Fred gave us the John Birch Society and who are now funding the Tea Party groups that are driving nuts the leaders of the US Chamber of Commerce, are poised to nearly if not actually double their current wealth by lighting the fuse on a carbon bomb that would speed the planet even faster towards becoming another Venus.

We’re talking about frozen glop that requires the burning of greenhouse-gas-releasing fuels just to get it out of the ground and heat it enough so that it can be mixed with natural gas and made to flow in a pipeline. This is before it even gets to Texas refineries, its penultimate destination before it’s shipped off for export to China and elsewhere. Rather than doing all of that, why not work on weaning the world off of fossil fuels?

The point is that Koch industries has claimed no interest in the oil sands at all and that Keystone is not one of their concerns yet this information seems to contradict that regardless of the formula and the final value it produces.

Yeah, kinda like how the Kochs tried to make like they really didn’t approve of shutting down the government and holding the debt hostage even though they fund all three of the far-right groups — Heritage Foundation, FreedomWorks, and Club for Growth — that bullied House Republicans into using the government and our economy as hostages.

By their logic, I would argue that not building Keystone XL (and any other Oil Sands lines from Canada – because that is the opposition’s objective) would cost the world economy a minimum of $500 Billion dollars per year – and likely a significant portion more when you include all of the natural gas and other substitute commodities that are traded under Oil price linkages in the world.

Assume that the marginal source of production of oil in the world is the Canadian Oil Sands (very likely if you are railing it out). This would maintain indefinitely the $15/Bbl extra transportation costs that these opponents claim that KXL would save the Kochs. The world currently uses 90 Million Barrels of Oil per day; a $15 per barrel extra cost placed on all oil traded in the world would cost consumers $492 Billion per year for starters. Undiscounted over a 60 year period (roughly the reputed Koch Bros reserves divided by KXL capacity) and you would be looking at an extra $30 Trillion in costs imposed on consumers at just today’s consumption level of Oil only.

Remember, biofuels, natural gas in Europe and East Asia are pretty much traded at oil price equivalencies. These too will bear the higher cost of transport from Western Canada to markets by rail as compared with pipelines.

The problem with that logic is that this stuff is so expensive to blast out of the permafrost that the only way it’s profitable is to ship it via pipeline on land or supertanker by sea.

The Kochs (who as James Tripp pointed out above have long denied any interest in Keystone XL) would love to be able to ship it to China directly as opposed to taking the long way around via Houston as is their current plan. (What, you thought the oil would be sold in the US? Ha!) But they can’t do that as Western Canada has no ports capable of handling supertankers. (Regular ones, yes; supertankers, no.)

The report being discussed claims that it is profitable to produce and move with out KXL at a $15 higher discount than would be with KXL. Currently without KXL the discount is in the $25 range (meaning KXL would reduce it to about $10).

The highest cost marginal sources of oil production in the world is in North America; the Canadian Oil sands and the tight oil plays (e.g. Bakken).

Currently over 3 Million barrels per day of crude similar in “quality” to dilbit comes into the USGC from Saudi Arabia, Venzuala and Mexico. It would make no economic sense for these countries to ship their oil in while others ship similar oil out; all parties will leave money on the table.

Even if you are right about exporting it from the USGC (and you aren’t); bringing the Koch’s dilbit into the USGC and exporting it would help increase world oil supplies and result in oil prices lower than they would be without KXL. That extra $15/Bbl transportation cost imposed by not having pipeline outlets to ports will keep production lower than it otherwise would be and resulting in higher overall prices for all consumers of oil.

The real problem, is that the Koch brothers along with many other people are vehemently opposed to the socialist policies that guide the Liberal Democrats. These liberals follow the principle that, since they can’t win on facts, they attack with emotion and the Koch brothers have become lightning rods for their hatred. Just remember, figures don’t lie, but liars can always figure.

This report is barely worth commenting on other than for its sheer absurdity. Just multiply this magical $15 per barrel bonus through the entire 200 billion barrel Athabasca reserve and you’ve added $3 trillion in producer surplus to Canada. It doesn’t pass the laugh test. My guess is they are off by two orders of magnitude.

That’s $3 trillion over 50+ years. Or about 0.06 trillion per year. The current Canadian GDP is 1.8 trillion per year, so the numbers you multiply together represent about a 3% increase in Canadian GDP.

Current production is 1.25 million barrels per day, so the $15 per barrel premium would be under $7 billion per year, or around 0.3% of Canadian GDP.

Have you spotted Tim’s failure to allow for a further century of inflation?

It would take generations to drain those two million acres of bitumenous goo, and in that time , a very few % a year would suffice to turn the pipeline into an exponential cash cow , because of the high and rising fuel cost of dispatchng it thousands of mir=les by tank car to be refined or exported.

Using the simplest of math 15 billion barrels of oil at 500,000 barrels per day will take over 82 years to produce. So, even if these “profit” figures were accurate, the Koch’s would make $1.2 billion a year. This doesn’t take into consideration the up-front investment.

Of course what wasn’t factored in to the equation was the pollution to be paid by the rest of us for Koch’s making that money. Last estimate I saw claimed that about 5 million had already died from global warming and that figure is just increasing. How many dead children will be earning profits from XL? This was a very stupid article, not even taking into account the real cost to the planet of Keystone.

!5 billion barrels at 830,000 barrels per year carried down the pipeline is 50 years of pipeline operations. A profit of $2 billion on an investment of $7 billion is the basic ballpark type of ROI that an energy company, or Warren Buffet, would be looking for. So, basically, by your analysis, you’ve shown that the Koch brothers are likely to reap a $100 billion profit.

For many projects, a $100 billion profit for humanity would be real nice. However, here the profit derives from using a shared common resource, the atmosphere, for the benefits of the Koch brothers. Dumping that much carbon into the atmosphere without compensating other users of the atmosphere for that dumping isn’t right.